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  • Emerging Markets Debt Daily

    India Inflation Justifies Rate Cut

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 11, 2019

    India’s downside inflation surprise gave credence to the recent policy rate cut. South Africa’s underwhelming domestic activity raises the probability of a rating downgrade.

    India’s inflation delivered a massive downside surprise in January, giving credence to the central bank’s recent policy rate cut and feeding market expectations of additional easing. Headline inflation moderated to 2.05% year-on-year and December’s print was revised downwards to 2.11% on the back of lower food and fuel prices. Commentators, however, caution that the pre-election spending spree can add to inflation pressures down the road. Sticky core inflation (see chart below) also argues against rushed easing, especially as activity surveys remain fairly benign.

    South Africa’s activity indicators continue to underwhelm. Manufacturing production barely moved in December (0.5% year-on-year in seasonally-adjusted terms), and intensifying power cuts suggest that risks are tilted to the downside. Lukewarm growth, in turn, raises uncertainty about the government’s fiscal performance and debt ratios, increasing the probability of a rating downgrade.

    A weaker than expected NFIB Small Business Optimism Index1 in the U.S. contributed to the U.S. dollar’s underperformance in the morning trade. The weakness was broad-based, with the headline index dropping to the lowest level since November 2016. Even though this dynamic partly reflects the government shutdown, it is likely to strengthen the narrative that the U.S. growth advantage is waning, both against developed market peers and emerging markets.


    Chart at a Glance

    Mexico Industrial Production

    Source: Bloomberg LP

    1The NFIB Small Business Optimism Index measures the opinion of small businesses on the economic conditions of the country.


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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